Question: Management of Braden Boats Inc is considering an expansion in
Management of Braden Boats, Inc., is considering an expansion in the firm’s product line that requires the purchase of an additional $175,000 in equipment with installation costs of $15,000 and removal expenses of $2,500. The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciation and taxes as follows:
The firm’s income tax rate is 30 percent and the weighted-average cost of capital is 10 percent. Based on the net present value method of capital budgeting, should management undertake this project?
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